trading volume definition

You can see on the right side of the page that Best Buy’s volume on this day was 1.6 million shares and its average is 2.2 million. Instead, it makes more sense to look at volume as part of the big picture when evaluating a particular stock. Traders usually use volume in combination with other factors like whether the price is declining or increasing, and how much volatility there is. When a stock has an unusually high volume, it means something is going on with the company that investors should probably know about.

  • You can use the volume to determine the weakness or strength of a move, and the stronger the moving volume, the stronger the momentum.
  • So if 100 shares are traded in one trading day, the daily volume of the stock is 100 shares.
  • However, its accuracy, completeness, or reliability cannot be guaranteed.
  • Such passive investors utilize high-frequency algorithmic trading, which is a huge contributor to overall trading volumes in stock markets.
  • A downtrend accompanied by increasing and/or above average volume implies investors have doubts about the stock, which could lead to more selling and even lower prices.
  • Trading with NAGA Trader by following and/or copying or replicating the trades of other traders involves high levels of risks, even when following and/or copying or replicating the top-performing traders.
  • The other thing to look for with average volume is whether the stock is liquid enough.

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What is Relative Volume and Why Does It Matter?

Trading volume, which measures the number of shares traded during a particular time period, can help. In the above chart, Best Buy’s ADTV is around four times that volume. Note that this rule of thumb is intended for traders and speculators who don’t intend to hold stocks for the long term. If your goal is a five-year holding period, you will only need to worry about the average daily volume if it is close to the position you’re trying to start.

What is good trading volume?

Thin, Low-Priced Stocks = Higher Investment Risk

To reduce such risk, it's best to stick with stocks that have a minimum dollar volume of $20 million to $25 million. In fact, the more, the better. Institutions tend to get more involved in a stock with daily dollar volume in the hundreds of millions or more.

The second trader, Y, buys 200 shares and sells 100 shares of the same stock, Gamma, to X. Technical analysis of an asset’s volume helps traders determine if certain situations are occurring, such as a true trend reversal. These volume reports usually come out in real-time, but they are only estimates. In trading, the volume is the amount of a particular asset traded over a period of time. Traders tend to use the volume indicator as an attempt to gain a better understanding of the strength of a given trend. If volatility in price is accompanied by high trading volume, it may be said that the price move has more validity.

Formulas related to this definition

For accurate volume figures, traders usually have to wait until the end of the day. When a market is described as “active” it indicates that the trading volume will be higher, and if the market is described as “inactive” it means that the trading volume will be lower. We can see on the chart that, at one point, the stock price fell from around $125 to $112 a share.

The average volume of a security over a longer period of time is the total amount traded in that period, divided by the length trading volume definition of the period. Therefore, the unit of measurement for average volume is shares per unit of time, typically per trading day.

4.5. Evidence for Heavy Tails in Volume

It can also illustrate momentum, which happens when stocks, assets, or sectors are trending higher—and perhaps just as importantly, volume can also help to indicate when a trend is ending. Volume, or the amount of trading activity per security, is one way for investors to gauge investment trends as well as momentum. Higher trading volumes are considered more positive than lower trading volumes because they mean more liquidity and better order execution. 4 Given potential latencies with off-exchange trade reporting, we checked this trend by measuring TRF volume by prices at increments of full penny, one-half cent, and sub-penny. We find that volume with one-half cent increments declined from 29% of TRF volume in January to 21% in June. A rise in volume tends to kick off significant price moves in many cases, however it is not a requirement. Despite conventional thinking, breakouts or breakdowns don’t always require heavy volume especially in this age of algorithms that know precisely what price levels will efficiently trigger significant movement.

trading volume definition